Why does stamp duty exist on properties?
Thursday, 2 February 2012 1:16 PM
Have you ever wondered why you have to pay residential or commercial stamp duty when you purchase a property?
Essentially, you are being asked to pay thousands of pounds for buying a place to live, so it is important to know where stamp duty land tax began, how it has evolved and how it exists today.
The introduction of stamp duty
To find out why stamp duty exists, you need to go all the way back to 1694.
This was the time when the UK was fighting a war against France. As wars are an expensive exercise, William and Mary needed some way to generate money to fund their troops and help them to victory.
To begin with, stamp duty was only intended as a temporary measure, however, it proved such a successful way to raise funds that it was never abolished.
In its original form, stamp duty was not levied on property purchases and was instead used to raise money from 'vellum, parchment and paper'.
It was only in 1808 that stamp duty was charged on property transactions.
Since its inception, stamp duty has been applied in various forms including the stamp duty reserve tax, which was introduced under the Finance Act 1986 as a way of taxing shares.
In terms of property transactions, it was the introduction of stamp duty land tax in 2003 that was a defining moment.
SDLT and the Finance Act 2003
The Finance Act of 2003 introduced what is known today as stamp duty land tax. SDLT is a charge on property transactions and came into effect on December 1st 2003.
It replaced the system implemented by William and Mary some 300 years earlier.
If you are buying a property where the contract was drawn up before July 10th 2003 and the transfer documents are yet to be stamped, SDLT is still payable. However, with effective stamp duty planning, you could reduce the amount you have to pay or avoid it completely.
How does stamp duty land tax work today?
If you are a first-time buyer purchasing a home with a list price below £250,000, you will be exempt from stamp duty land tax.
Other exemptions include those buying zero-carbon homes below £500,001, those investing in properties in disadvantaged areas under £150,000 and any transactions on properties listed below £125,000.
Unless you fall into one of these categories, you are liable for SDLT.
A one per cent rate of stamp duty is levied on properties between £125,001 and £250,000, which rises to three per cent for those listed between £250,001 and £500,000.
Transactions on homes priced between £500,001 and £1 million incur a four per cent rate. If you are buying a home costing more than £1 million, you will have to pay stamp duty at five per cent.
Stamp duty has existed in some way, shape or form for more than 300 years and does not look like it is going away.
That does not mean there are not avenues you can explore that will reduce your bill.
Stamp duty mitigation involves exploring ways in which you can cut your stamp duty rate or avoid paying it altogether.
As the amount of money you have to pay can be substantial, looking at ways to reduce it might be a good idea and leave you with money to invest in your new home.
